The truth about binary options

Binary options are investment products taking the Internet by storm. If you are looking for ways to make money online or for new financial products, then you probably saw advertisements for binaries, including from adsense as they pop up everywhere. But what are exactly these binary options and are there for anyone?

To put it simply, binary options are equivalent to taking tailor-made bets on financial markets. Or not to sound too much like gamblers, let’s say they let you make predictions about future prices. Do you think gold will go up today? Then buy a one day call binary option on gold. If you are correct you can make a 70 to 85% profit. But if you are incorrect, and this is a big ‘but’ you will lose 100% of your option.

One benefit of binary options is that they are really a novel trading tool not previously available to the small trader/investor.

What you can do with them is take a position solely based on your prediction of a scenario about a specific asset price. There is a list of scenario types available to trade. The call/put version simply means that the market will rise or drop. There is also the range option, i.e. will price remain between two boundaries or exit that range. Then strikes for calls and puts can be made out of the money, which offers a higher return but a lower chance of success. And the choice of underlying assets to base your trade on is vast, from stock indices, currencies, commodities, to large cap international stocks.

Clearly these options are some hybrid form between gambling and trading, as they are bets applied to financial markets. They are mostly short-term bets, as they can be as short as one minute with the 60 seconds version. In that sense they are quite similar to ‘day trading’, that is a form of trading where traders try to benefit from short intraday trends. But they have fixed odds and durations, hence they offer a different risk profile.

Now let’s look at the disadvantages of binary options. First of all can someone make money from them? In the example above that has a common risk/return ratio, you will lose 100% if you are wrong and make 85% if you are right. So obviously if you trade binaries on a regular basis you must be right more often than wrong in order to show a profit. The breakeven point is that if you are right 54,1% of the time, you will not lose or make money.

Can a regular person without much financial savvy make correct market predictions at least 54.1% of the time? No. If you want to verify that this is a scientifically proven ‘no’, check any research paper on market efficiency. In fact if we take the extreme example of the 60 second option, trading them is equivalent to a coin flip: there is as much chance for any market to go down or up in the next minute, unless you have some sort or private information about this asset.

In summary binary options are certainly an innovative form of trading financial markets, and they can be appealing to a fraction of people. If you are comfortable financially and like the thrill of short-term volatility trading, then you may enjoy binary trading. But do not expect to make a lot of money from them, if at all. On the other hand these products are not recommended for people who only vaguely understand financial theory and who are in search of a new income stream. No, you will not retire next year in the Bahamas from trading them. You have been warned.

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